Elasticity of Demand Video Lecture | Business Economics for CA Foundation

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FAQs on Elasticity of Demand Video Lecture - Business Economics for CA Foundation

1. What is the concept of elasticity of demand?
Ans. Elasticity of demand refers to the responsiveness of the quantity demanded of a product or service to a change in its price. It measures how sensitive consumers are to price changes. If demand is elastic, a small change in price will result in a proportionately larger change in quantity demanded. On the other hand, if demand is inelastic, a change in price will have a relatively smaller impact on quantity demanded.
2. How is the elasticity of demand calculated?
Ans. The elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The formula for price elasticity of demand is: Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price) If the resulting value is greater than 1, demand is elastic. If it is between 0 and 1, demand is inelastic. If the value is exactly 1, demand is unitary elastic.
3. What factors determine the elasticity of demand?
Ans. Several factors determine the elasticity of demand. These include the availability of substitutes, the necessity of the product, the proportion of income spent on the product, and the time period under consideration. If there are many substitutes available, demand tends to be more elastic. If the product is a necessity or a small portion of income is spent on it, demand tends to be inelastic. Additionally, in the long run, demand tends to be more elastic as consumers have more time to adjust their consumption patterns.
4. How does elasticity of demand affect pricing decisions?
Ans. The elasticity of demand plays a crucial role in pricing decisions. If demand is elastic, a decrease in price will lead to a proportionately larger increase in quantity demanded, resulting in higher total revenue. On the other hand, if demand is inelastic, a decrease in price will only lead to a relatively smaller increase in quantity demanded, resulting in lower total revenue. Therefore, businesses need to consider the elasticity of demand when setting prices to maximize their revenue.
5. Why is understanding elasticity of demand important for businesses?
Ans. Understanding the elasticity of demand is important for businesses as it helps them make informed decisions regarding pricing, production levels, and marketing strategies. By knowing the elasticity of demand for their products, businesses can determine the impact of price changes on their revenue and profitability. It also allows them to identify potential market segments with higher demand elasticity, which can be targeted with specific pricing or promotional strategies to maximize sales. Overall, understanding elasticity of demand enables businesses to adapt and respond effectively to changes in market conditions.
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